Herb Stevenson
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How the Mighty Fall and Why Some Companies Never Give In

Jim Collins, 2009

The Five Stages of Decline

Recently, Jim Collins expanded the prior research into how once great organizations fall and some recover and while others completely obliterate themselves. In the following paragraphs we will briefly examine the five stages of decline and potential for recovery.

Stage 1: Hubris Born of Success

Hubris is defined as excessive pride that brings down a hero or an outrageous arrogance or entitlement that inflicts suffering upon the innocent. Typically, when past accomplishment creates a sense of invulnerability and a guarantee of future success, hubris has set in. It is the false sense of security that we can create something from nothing as may have been the case when the firm was founded or when it rose from the ashes in a past debacle, crisis or decline. A critical difference is that hubris connotes a sense of being the chosen ones, whereas success is based on survival and a strong sense of humility that leaves the possibility of failure as a driving force to overcome the adversity.  For example, the railroad industry demise in prior decades was due to the failure to accept they were in the transportation business.

An associated process of hubris is neglecting the primary and driving force for success of the organization, the “flywheel”.  The “flywheel” is the driving force or the ongoing momentum built from maintaining a clear focus of continuous improvement with visible results. This organizational energy is driven by the multitude of people in the organization moving forward much like a herd of horses. Collins refers to this as a cycle where the solidifying effect of the intersecting circles of the hedgehog concept1  support steps forward that creates an accumulation of visible results which then encourages people to actively participate thereby providing energy to support the organizational  momentum—a self sustaining process.

When the “flywheel effect” does not occur, energy becomes diffuse and unfocused leading to the “doom loop” wherein without unifying hedgehog concepts, there are disappointing results, that leads to blame and shame reactions, without really understanding what is happening that leads to the organization trying to correct it self with a new direction, leader, event, fad, or acquisition. When this occur, the organization’s focus and resources are too diffuse to build energy and therefore there is no organizational momentum to move forward. It becomes a loaded train of 100 cars trying to leave the station with one steam locomotive with little coal and little water.

Another characteristic of stage one decline is the loss of the adventurous, open-minded, searching orientation for continuous learning. Answers are believed to be found in the years of experience, which might be useful, yet often can be blinding in new situations. Typically,  generational and positional gaps present themselves with one-up-man-ship dynamics by those with positional power or organizational tenure. The past filters the present so that a true future cannot be created without showing  “due” and “respect” for those that lived the past. Clearly, an issue of pride.

The final characteristic is to believe that the only luck in prior success was the result of hard-work, superior thinking, and self righteous leadership. Luck can be supported by hard work, great thinking, and strong leadership, however to dismiss it is like being blind to the fact that there is both good and bad leadership, not just leadership which nefariously can be used to justify much maligned action.

Stage 2: Undisciplined Pursuit of More

Often, a perception has evolved that organizations failed because complacency sets it. Even though this is a possible cause, it less likely as leadership change-outs tend to occur much quicker. Nonetheless, for many decades, “bigger is better” has been used as an unquestioned performance elixir. Collins refers to this as overreaching where the quest is for unsustainable growth while confusing big with great. Energy and resources are stimulated by blind or unbridled ambition, creativity, aggression, and/or fear. Unsubstantiated expectations lead to strayed resources and diminishing performance.  Examples are Motorola and Rubbermaid which invented more products than could be marketed or reasonably brought to market successfully while the organizations blindly fell towards their demise.

When the intersecting circles of the hedgehog concept lose their coagulating capacity to hold the passion, values, capacity to be the best, and/or economic momentum together, the organization falls prey to undisciplined discontinuous leaps. Instead of focusing on what’s best for the organization, efforts are focused on the next best discovery without finding the synergies to the core organization.

Coinciding within this stage is the loss of key talent. “The right people” begin to leave because the organization has lost sight of its core. Mediocrity permeates performance as tenure supercedes actual performance or growth economies forgive incompetency. Either way, the organization regresses developmentally from people first to product or strategy first. The flow of cash and/or profits hide the inefficiencies so that cost growth is compensated by price increases instead of greater efficiencies through disciplined action and thought.

Sedimentation of management occurs where bureaucracy supercedes disciplined action and thought. Momentum is directed to preserve the past instead of using the present to create the desired future. The focus is more on personal instead of organizational interests by  preserving bonuses, legacy building and back-patting instead of insuring the future. The organization becomes a job container.

Succession planning becomes disruptive instead of innovative. Candidates are groomed to preserve the prior legacy or to preserve the performance from the past instead of setting sights for adapting adequately to be the best while insuring great performance. Slippage to level four or lower leadership occurs as the board loses sight of what made the organization great by focusing on quarterly or annual performance and giving leadership unearned benefit of doubt, when it reality questioning the basic premise of from the past that is guiding the organization demands a hearing. Bank America’s recent turbulence leading to the federal regulators requiring a wholesale revision of the board is an example of the necessary corrective action for an organization’s undisciplined pursuit of more.

Stage 3: Denial of Risk and Peril

The third stage begins the process of losing one’s center where the tendency is to amplify the positive and discount the negative. Candy coating results becomes more the norm than the exception. Single loop learning becomes single loop excuses instead of delving deep into the situation to look at the assumptions underlying the situation and finding completely new and innovative solutions.

Big bets and bold goals without empirical validation lead to massive blunders, miscues, failures, and accelerated decline. Individual vesting in ideas and fantasies of what could be override facts like yarns spun around a campfire. Questioning leadership’s vision, though unsubstantiated by facts or evidence, becomes the equivalent of stating that the emperor has no clothes. The organization colludes at all levels with the fantasy rather than be the focus of the organization’s belittling  and leadership’s wrath. The board tends to make excuses for why it must support the fantasy instead of doing its own assessment and requiring corrective action. The bottomline of the collusive denial  process is that huge downside risk is incurred  based on ambiguous data, leading to an erosion of healthy team dynamics and an externalizing blame.

When focused internally instead of externally, obsessive reorganization can indicate the depth of denial and incapacity to deal with the reality. It creates a false sense of dealing with the problem and generally is indicative that the “right people” work for another company as a realistic assessment cannot be mounted against the increasing decline.

Imperious detachment through symbols of power, perks of status, and acts of anointed and unearned privilege suggests that leadership has lost sight of who is in service of whom. Instead of serving the organization, the anointed uses resources to serve oneself with symbols, perks and bonuses regardless of performance. Bank of America’s hiring of Sallie Krawcheck and other high powered executives reflects the necessary changes required to break the mold of the past and create what’s required for future greatness.2

Stage 4: Grasping for Salvation

Grasping for salvation suggests the organization has lost awareness of the soul of its own greatness. Change for change sake through a series of “silver bullets”, such as leaps into new technologies, new markets or new businesses become the thread of searching for the “home run” that can bring the organization back into the black, instead of hunkering down to acknowledge its dying state and re-establish it hedge hog. The disciplined thought of facing the brutal facts and building its hedge hog  is like having one eye on “what is” and the other eye on “what could be” based on who we are as an organization. It  must  guide all decisions. Rarely can “what was” be a determining factor because it can the “black hole” that is blinds the organization from the necessary blunt conversations and actions.           

The gap between the ideal and what is real gets larger as “hype precedes results”.  No longer wedded to the brutal facts, the focus shifts to imagineering the organization’s saving grace. Chronic inconsistency permeates each new “revolution”, “future state” or “dream” of what could be similar to a pied piper leading lemmings to their demise. The organization is driven by its fragmentation as evidenced  by its lack of a coherent and shared compelling picture of the organization.  Chronic restructuring can occur as each act provides the illusion that doing something is better than doing nothing, while eroding the solvency of the organization. Hope shifts to confusion and cynicism as the unifying comradery of the hedge hog is gone.

Typically, the leadership falls into the exact same logic that has caused the downward spiral, leading to panic and desperate actions. During such times, it requires a clear head and the courage to go inside the organization to find the warts, instead of remaining bullheaded, dogged, and determined.  Lou Gerstner recreated IBM by “going dark” while he led deep discussions about what made “Blue” great.  “He  returned to the intense, methodical, and consistent approach that produces greatness”, instead of  becoming the organization’s savior. Instead of believing that he must provide the answers, he reminded the organization how to find its own best solutions.  Similarly, Jerry Junkins quietly returned Texas Instruments “to greatness by igniting vigorous dialogue and debate, and channeling its efforts into businesses in which it had a chance to become best...” Both Gerstner and Junkins embraced the brutal facts, while maintaining absolute faith in the organizations success and reinvented what made the organization the best in their targeted arenas.

Stage 5: Capitulation to Irrelevance or Death

The fifth stage sharpens the echoes of insolvency into a stark reality “for whom does the death knell ring”. The demise of the organization is at hand and either the leadership prepares for a fire sale, while it hunts for a saving organization as happened at Rubbermaid, or unable to capitulate to the impending demise, leadership remains true to the same logic that put the holes in the ship and rides it into the deep blue abyss as happened to General Motors. In either situation, when the ability to make strategic decisions is replaced with day-to-day survival decisions, the odds of recovering from the death spiral are slim. In General Motors situation, the government bailout forced it to face the stark reality and make the painful changes that will provide another chance to return to greatness.

Generally, the board and leadership become locked into a “group-think” stalemate that feels like a catch-22—damned if you do and damned if you don’t that eventually unites around abandon ship because we’ve done we could or we will go down with the ship. Both of these options can be embedded with false integrity.  Once this occurs, the organization has lost it humility and fierce resolve of level five leadership and has regressed into a level three or lower. At level three, leadership organizes people and resources toward the effective and efficient pursuit of predetermined objects typically of how to establish the best funeral procession.

The Road Home

In all of the stages, the real issue that occurs is that somewhere along the line leadership and the organization lost sight of its own greatness. In many cases, organizations have not discovered their road to greatness and fell prey to their own unknowing  that any one can make money in a booming economy and real leadership is discovered during a down turn or when real competition enters the market. It’s a safe bet that a leader fell out of grace with one’s  own greatness when there are a lot of reasons why performance is sinking, instead of having relentlessly moved towards recreating the right to exist through rediscovering the hedge hog that will recreate the organization’s flywheel—the momentum for success.

Recap of Good to Great Principles.

Stage 1: Disciplined People: Level 5 Leadership & the Right People
Stage 2: Disciplined Thought: Facing Brutal Facts & Absolute Faith by Creating Hedgehogs
Stage 3: Disciplined Action: Culture of Discipline & Flywheels
Stage 4: Building Greatness to Last: Clock Building & Stimulating Progress

 

Footnotes

1 Hedge Hog’s three intersecting circles: (1) what we can be best in the world, (2) what are we deeply passionate about, and (3) what best drives our economic or resource engine. 

2 Personally, I believe that without a balanced blend of outside ideas created by bringing in enough new blood to regenerate the community of leadership, the equivalent of executive incest occurs, resulting in various forms of unseen, unintended and unexpected leadership defects.

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